UK Housing Data Heightens Bubble Fears

Although several BoE and government officials have refuted the idea of a potential housing bubble brewing in the UK, the housing price and mortgage data over the past few months suggest otherwise. Against this backdrop, measures announced by the BoE to curb the housing market spiral taking effect in the coming months will be closely followed. Across the Atlantic, economic recovery is steadily gaining a foothold and sustained improvement in the economic environment is likely to prompt the Fed into further scaling down its asset purchases in the coming months. Elsewhere, the Euro zone has failed to offer concrete signs of economic revival and investors are likely to stay on the sidelines in the near term.

Pound Sterling – UK Markets

After momentarily breaching the 1.66 mark, Sterling weakened and slipped below the 1.65 level against the greenback yesterday following the release of the disappointing British manufacturing PMI report. Manufacturing activity in the UK unexpectedly cooled for December, highlighting that obstacles to economic recovery continue to persist. Additionally, mixed US economic data released later in the day further pressurised the Pound amid increased demand for the greenback. Meanwhile, Sterling is trading in a tight range against the greenback this morning. Data just out has pointed towards continued strength in the domestic housing market. While mortgage approvals continued to rise for November, construction activity in the nation also remained strong despite a slowdown for December. Additionally, a Nationwide survey indicated that house prices in the UK surged for December amid increased demand, fueling speculation that government policies might be creating a housing bubble. Later today, speeches by influential Fed policymakers including the Fed Chairman, Ben Bernanke, will sway market sentiment towards the Pound-US Dollar pair.

US Dollar – US Markets

The greenback moved higher against its counterparts yesterday amid risk aversion following mixed economic data from the US. Continuing jobless claims fell less than expected during the last week while weak ISM manufacturing PMI numbers for December saw the US Dollar get a decent share of safe haven flows. However, the number of people claiming first-time unemployment benefits fell unexpectedly during the last week, while construction spending in the US rose unexpectedly for November, signifying a pickup in the housing sector during the final quarter of 2013. Meanwhile, the greenback has continued to trade on a stronger footing against most major currencies ahead of a slew of speeches from US policymakers, especially by voting members of the Fed this year, Jeremy Stein and Charles Plosser, along with a speech by Ben Bernanke. In the forthcoming week, investors have their hands full in terms of domestic macro releases, including the all-important non-farm payrolls report and the minutes of the latest Fed monetary policy meeting.

Euro – European Markets

The single currency continued to weaken against the greenback yesterday after the release of mixed European manufacturing PMI data. Although Germany, Italy and Spain posted better than expected PMI numbers, Euro zone’s manufacturing PMI numbers remained steady, while manufacturing activity in France slipped further into the contraction territory for December, dampening investors’ sentiment towards the Euro. Additionally, indications that the US economic recovery is gaining strength further weighed on the common currency. Meanwhile, data released earlier today showed a significant fall in the number of unemployed people in Spain, signalling that the nation’s labour market is recovering from its worst unemployment crisis. Additionally, the nation’s annual consumer price inflation remained steady at 0.2% for December. However, the largely upbeat economic data has done little to cheer Euro investors this morning. Later today, the Italian consumer price inflation report, which is expected to show an accelerating inflation trend in the economy, will be keenly eyed by market participants. With little on the domestic macro front today, investors are looking forward to next week’s Euro zone services PMI and consumer price inflation reports, among others, for further direction.

Other Currencies – Highlights

The Swiss Franc has continued its recent downward trend against the US Dollar this morning following a set of mixed domestic economic reports released earlier today. The manufacturing PMI report showed deterioration in the manufacturing activity in Switzerland, largely in sync with the recent economic data that has raised questions about the strength of the nation’s economic recovery. The better than expected forward looking Swiss KOF leading index has also failed to put a brake on the Swiss Franc’s losses against the majors today. The Swiss Franc has weakened steadily against the greenback over the past few sessions amid an improving economic environment in the US. With no domestic economic data to trigger risk appetite, investors will keep a tab on news flows emanating from both sides of the Atlantic in the session ahead for further direction. Meanwhile, next week’s crucial domestic labour market and consumer price inflation numbers will prove crucial for the Swiss Franc against the majors in the near term.